Journal of Financial and Quantitative Analysis Vol. 52 No. 2 2017

Institutional Investment Constraints and Stock Prices

Jie Cao^{1,2,3,4,5,6,7,8}; Bing Han^{1,2,3,4,5,6,7,8}; Qinghai Wang^{1,2,3,4,5,6,7,8}

¹ University of Central Florida · ² Chinese University of Hong Kong · ³ Shanghai Jiao Tong University · ⁴ University of Toronto · ⁵ Hong Kong University of Science and Technology · ⁶ Peking University · ⁷ The University of Texas at Austin · ⁸ University of Hong Kong

Abstract

We test the hypothesis that investment constraints in delegated portfolio management may distort demand for stocks, leading to price underreaction to news and stock return predictability. We find that institutions tend not to buy more of a stock with good news that they already overweight; they are reluctant to sell a stock with bad news that they already underweight. Stocks with good news overweighted by institutions subsequently significantly outperform stocks with bad news underweighted by institutions. The impact of institutional investment constraints sheds new light on asset pricing anomalies such as stock price momentum and post–earnings announcement drift.

DOI

10.1017/s0022109017000102

Volume

52

Issue

2

Pages

465-489

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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